A morning commuter walks past the CIT Group Inc. building in New York, in this November 2, 2009, file photo.

Credit: Reuters/Brendan McDermid/Files

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NEW YORK (Reuters) - CIT Group Inc (CIT.N) had preliminary talks over the past year and a half to sell itself to banks, including Toronto-Dominion Bank (TD.N) and Wells Fargo & Co (WFC.N), but nothing came of the conversations, according to three people familiar with the specialty finance company.

Goldman Sachs (GS.N) bankers have had informal talks on behalf of CIT with a number of banks, but the Wall Street firm has not been formally retained as an adviser, according to two of the people. CIT Chief Executive Officer John Thain, who formerly worked at Goldman, is not under any immediate pressure to sell the company, the sources said.

Spokesmen from CIT and TD declined to comment on what they characterized as "speculation and rumors." A Goldman Sachs spokesman and a Wells Fargo spokeswoman declined to comment.

While CIT does not have a sales process in place, selling itself could be a quick fix for some of its difficulties. The company has higher funding costs than its competitors do because it has fewer deposits, which makes it harder for CIT to offer competitive rates when it lends. But getting regulators to allow the company to fund more of its businesses with deposits has taken time, analysts said.

Deposit funding is crucial for CIT, which has an online bank with $9.6 billion in deposits. Before the financial crisis, it relied heavily on bond market borrowing to fund its assets, including railcar and airplane leases, loans to finance retailers' inventories, and loans to small businesses.

But during the crisis, CIT lost access to that funding. It became a bank holding company in December 2008 just before it received $2.3 billion of bailout money, but the emergency funds were not enough, and it filed for bankruptcy in November 2009.

Since emerging from bankruptcy in December 2009, CIT has increased its reliance on deposit funding and has wiped out $30 billion of high-cost debt, reducing its funding costs, but analysts say the company still has work to do.

Since August 2009, CIT has been under a written agreement with the Federal Reserve Bank of New York that gives the regulator broad power over the company's capital plans, corporate governance and risk management.

Last month, Thain said CIT did not have a timetable for when the New York Fed might lift its written agreement or provide guidance on its capital plan, but he did say that it could get approval to return amounts of capital to shareholders. CIT is seeking permission to return a "modest" amount.

If CIT sells itself, it could get out from under the New York Fed's written agreement, enabling it to put excess capital to work and provide a higher return on equity to shareholders, analysts and bankers said.

Janney Capital Markets, for example, estimates that CIT has about $2 billion of excess equity capital that it could return to shareholders.

"It could take a while for all of the excess capital to be returned to shareholders, and a large bank that buys CIT might be able to extract that capital more quickly," said Janney analyst Sameer Gokhale.

BARRIERS TO A SALE

Foreign banks, particularly Canadian or Japanese banks that have expressed interest in expanding in the United States, may be candidates to acquire CIT, the bankers said.

But analysts and bankers warned that there are a number of barriers to a sale of CIT, including finding a bank that wants all of the company's businesses.

TD, for example, might be interested in CIT's factoring business, which finances retailers' inventories. But sources said the Canadian bank would be less interested in something like airplane leases, which require a good deal of capital.

Moreover, regulators are under pressure to reduce systemic risk and are unlikely to allow large acquisitions by financial institutions anytime soon.

"None of the major banks have a hall pass from the regulators that would encourage them to buy a company like this," said Sterne, Agee & Leach analyst Henry Coffey.

One idea suggested by bankers would be for CIT to combine with auto lender Ally Financial, whose bank has about $50 billion of deposits.

CIT would gain more deposit funding, and government-owned Ally would have a broader array of assets. Right now, Ally has mainly car loans, leaving it poorly positioned for any slowdown in that sector.

Ally would probably not be able to do a deal until it resolves the bankruptcy of its Residential Capital LLC unit, which housed most of the company's mortgage assets. That bankruptcy is expected to continue for months. Ally declined to comment.

Under Thain, CIT has been steadily working through its problems since emerging from bankruptcy.

In the fourth quarter, CIT posted its first profit in four quarters as its program to cut high-cost debt started to pay off.

CIT has also been building other businesses. In November, it said it had launched a maritime finance business to underwrite large ships, an area where it believes it has growth opportunities as lenders in the space pull back.

Last month, it said it had acquired $1.26 billion of commercial loans from U.S. Midwestern regional bank Flagstar Bancorp (FBC.N).

CIT's stock price has jumped to nearly $42 as of Friday from around $32 when Thain took over.

Some analysts said that if the stock were to get to $55 or higher, a serious exploration of a sale would make better sense.

"Why would they quit now, just after all of that hard work?" Coffey said. "There would be no benefit selling today when you can wait a year or two and have a better bid."